As reports surface of a behind-the-scenes push for temporary pension funding relief by several plan sponsors, observers say it may be time to overhaul the rules on solvency funding.

Some companies have admitted that their required pension plan contributions may push them into bankruptcy amid the economic crisis. They are looking for a similar relief program as the 2006 instance in which the federal government took temporary steps to ease pressure on defined benefit (DB) plans for employees in industries under federal jurisdiction.

“We’ve dealt with this before and we acted before,” Finance Minister Jim Flaherty said in Toronto on Wednesday. “And what has been done before can obviously be done again.”

“I think we need to investigate what the purpose of solvency funding is, and whether it’s structured to do the job it’s intended to,” says Kevin Sorhaitz, a principal at Buck Consultants in Toronto. He suggests it makes no sense to have rules to protect members’ benefits against an employer’s bankruptcy, only to ignore the rules at the moment of greatest threat. “I think we should revisit our intent as to how we fund these plans and the responsibility we put on the employers.”

The effect of the 2006 relief plan was largely positive, explains Sorhaitz, and raises the question of why another one is necessary when a more permanent solution might be found.

“Is this going to be a five-year trend?” he asks. “Do we keep requesting relief, or do we revisit the whole pension arrangement?”

Paul Forestell, leader of Mercer’s Canadian retirement professional group in Toronto is optimistic the latter will be the case. “I think they should, and I’m hopeful that they will,” he says. Forestell explains that it’s an entirely appropriate solution given that it’s been tried before on a temporary basis, and is becoming an increasingly relevant option in today’s economic environment. “We’ve had to make two temporary exceptions so far, so maybe it’s time to come up with a more permanent solution.”

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The current solvency funding problem, due to its potential scale, should be treated as a public policy issue, not something that can easily be resolved at the level of the individual employer, according to Steve Gendron, a principal with Eckler Ltd. He says it’s important to understand that plans that don’t operate in what is deemed to be a national sector of the economy (such as banking and transportation) are provincially regulated, and that both federal and provincial governments need to take action.

“Granting funding relief for 2009 in itself will likely not be enough,” he says. “In fact, it could make matters worse for plans that find themselves facing solvency valuations one year down the road.” Gendron explains that extending the amortization period for solvency deficiencies to 10 or 15 years at least offers the advantage of forcing plan sponsors to recognize the magnitude of the problem and to begin taking steps to deal with it.

What’s more, Ontario faces a unique problem in that it’s the only province with a Pension Benefits Guarantee Fund (PBGF), and has the further challenge of meeting the potential demand on the limited resources of the PBGF without saddling Ontario taxpayers with the bill, explains Gendron.

Allan Shapira, a principal at Hewitt, agrees that relief is needed, but says it must be the right solution in order to be successful. “We are in very unusual times that require some very unusual interventions, as we have already seen in the financial sector,” he says. “But any form of relief needs to be well thought out to balance the needs of all the stakeholders.” This is a great opportunity for all the jurisdictions to get together and come up with a unified approach, he explains.

The ramifications of this latest round of pension funding woes will likely revolve around yet more focus on risk management as well as a possible continuation of the shift to defined contribution (DC) plans.

“Plan sponsors will want to better understand the implications of the risks they are taking, particularly with investments,” says Shelley Speed, a principal in Hewitt’s Vancouver office. “They may change their long-term approach to managing risk.”

Gendron agrees, and says that DC plans will likely have a whole new level of appeal for employers looking to mitigate their risk.

“The challenge, of course, will be convincing jaded employees of their value, given the state of current DC plan members’ retirement savings, and the fact that many will now be forced to delay their retirement,” he says.

On the upside, the current situation may prove to be the impetus that governments and employers need to introduce some fresh pension design alternatives, according to Gendron. He suggests a multi-employer pension plan model, which combines a DB pension with a DC approach to funding.

“Let’s hope that the various provincial panels and commissions whose reports are due to be released recognize the need to stem the tide of DC conversions and facilitate the introduction of a better solution,” he says. “One that provides a reasonable measure of retirement security for plan members and predictable funding levels for plan sponsors.”

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